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MARY,
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Alimony tax rules

benefit government

AS MUCH as ex-hus-
hands aud ex-wives lead
separate fives alter a
marrige breaks down,
some ties st bind then
together,

By Harold Chmara
Conrributins Writer

For example. the higher:
Income spouse Often agrees
fo pus titmitenance or sup-
pert for an ex-spouse and/or

their children for a period of

time after the divorcee.
Existing tay rules generally
allow the paying spouse to
deduet the alimony of sup
port payments for income
tax purposes while the recip-
ient reports the payments as
taxable income on his/her
tax retum,

Recently, there have been
calls for changes to this sys-
tem. In Ontario, for example.
the Fair Tax Commission
argued that a spouse should
not be taxed on maintenance
or support payments. Such
calls for change. however,
puzzle chartered accountants
and tax experts because the
existing rules are designed to
give divorcing couples a sig-
nificant tax break.

Since the ex-spouse who
pays support is usally the
higher rcome carne. (htt
income would generally be
tased ata higher rate: thie
that of his ex-spouse. Cinder
the current rules. however,
ineome earned and payed to
the ev-spousc ais support is
taxed at the dower lax rate.
The result is that less ab the
pavee's ineome vous to the
tix man and more is av ail-
able for the ex-spouse and
their children.

Take the example of a
“typical” couple. The ex-
husband earns $36,000 ind
pis support of $6,000, The
ex wife cans $14,000, The
current rules mean that they
pay a total of about $10,230
in income tax if they dive in
Ontario. [f the system is
changed so the husband gets
no tax deduction for the sup-
port payments and the wife
receives the payments tax-
free, the total tax they pay
increases to about $11,080
— $850 more. The higher
the income level, the greater
the difference between tax
now paid, and the tax that
would be payable if the rules
were changed.

If the current rules were
changed and support pay-

ments were non-taxable, it is
obvious that the ex-wile
would save tax -- about
$1,620 in our example. But
inosuch tease, the ex-hus-
band woold either negotiate
lower suppork payments or
take fesal action to reduce
the ainount of bis current
payments. This is becuse
support agreements atre
worked out on at after-tax
hasts (given that a couple
has proper advies when
drawing up the agreement).
Since Hts after-tax income
would be lower it he were
used on the support pay-
ments, he would argue that
the pas ments themselves
should also be lower,

if the new rules were
made retroactive, the effect
could be dramatic for those
couples who tried the most
to be fair with each other,
Take the example of an ex-
husband and ex-wife who
each carn $40,000. Their
children live with the wife
and the husband pays
$10,000 annual support. If
the current rules were
changed. his annual tax bill
would increase by $4,100, a
huge cost that was not con-
sidered when the arrange-
ment was set up.

d CREASE © DEVELOPER HT CURPOR SOM